Market’s Weekly Bill of Health

Long-term picture continues to improve

With the market’s advance over the past week our longer term survey (200 day moving average evaluation) improved slightly while our more sensitive survey (MATA) shows more subsurface deterioration. The fact that our more sensitive MATA survey has yet to put a significant dent in our 200d moving average surveys supports the notion that we are experiencing an intermediate-term correction while the market’s long term bill of health remains positive.

* Note: For further explanation of the market surveys and background on analysis, please click here.

200 Day Moving Average Evaluation

As shown in the table below, the net percentage of stocks that are in uptrends increased from the prior week from 77% to 79% while the percentage of stocks in downtrends decreased from 23% to 21%. With roughly 4 out of every 5 stocks in the S&P 500 in uptrends and above their long-term 200 day moving average, the stock market’s long-term trend remains positive. In terms of sectors, the health care and financial sectors take the top spot with 94% and 90% respectively of their members in uptrends while energy and telecommunication services bring up the rear with 52% and 38% in uptrends respectively.

Classifying the four categories for the survey in terms of seasons helps to gauge the market’s maturity. This bull market remains to be dominated by the early bull market (AF, Spring) and late bull market (AR, Summer) categories, indicating the age of this bull market remains young as late bull markets have the AR categories dominating with more stocks also residing in the early bear market (BR, Fall) category. Given that the percentage of stocks in the early topping out phase (Fall, BR) that occurs before stocks move into their own private bear markets remains the smallest group at 1.2%, there is simply no evidence that the stock market is putting in a top and why we believe the current market weakness is merely an intermediate-term correction.

What also supports the notion that we are not in the process of forming a major market top is that the sectors most leveraged to the economy (and outperform when the economy is expanding) are leading the market this year. The technology, financial, and the consumer discretionary sectors are all up double-digits and are outperforming the S&P 500 by a sizable margin. Conversely, the non-cyclical sectors that do best in a weak to decelerating economy are performing the worst this year. If we are witnessing a market putting in a top we should see the non-cyclical sectors significantly outperform the cyclical sectors and this is simply not the case.

Source: Bloomberg

Moving Average Trend Analysis (MATA)

We saw a further worsening in the MATA survey for the S&P 500 in which the percentage of stocks in uptrends decreased from 53% to 49% with a corresponding increase for stocks in downtrends from 20% to 25% from last week. The percentage of stocks that are trendless decreased from 27% to 26%.

With 26% of the S&P 500 in the trendless category, any strength on the downside or upside could potentially increase the downtrend and uptrend categories in the weeks ahead. For evidence to support that the current intermediate-term correction is over, we will need to see the percentage of S&P 500 members in confirmed uptrends begin to expand again and exceed the 65%-70% healthy threshold.

52-Week Highs and Lows Data

The data for the S&P 500 for 52-week highs and lows continues to suggest a healthy bull market. Over the past month 27% of the S&P 500 (133 stocks) hit a 52-week high while only 4% (19 stocks) hit new 52-week lows indicating, once again, that the market is not in the process of putting in a major top. During such market tops you typically see nearly an equal percentage of stocks making new 52-week lows and highs as the market begins to deteriorate, which is clearly not seen in the data below.

Another point of interest is that the two consumer sectors, consumer staples and consumer discretionary, are the top two sectors indicating consumer spending remains strong on both discretionary items and essentials which is bullish for GDP due to its strong weight towards consumption. The energy sector remains a mess with new 52-week lows more than double the percentage of new 52-week highs as falling coal and natural gas prices continue to hurt the sector.

Source: Bloomberg

Summary

Given the above, the clear message is a healthy market with broad-based participation not showing any indication of rolling over into a bear market. Rather, we believe current market action reflects an intermediate-term correction within the context of a bull market that began off the October 2011 lows. One interesting dynamic that is likely to lead to sector rotation in the near future will be the breakdown or breakout of the USD from its consolidation this year. A breakout should benefit negative inflation-sensitive groups like consumer staples and consumer discretionary while a breakdown in the USD should benefit commodity producers and exporters.